8194 / Is the flexible rate option still available on the Hickam Standard?

In a January 30, 2013 Mortgage Letter 2013-01, the United States Department of Housing and Urban Development and the Federal Housing Administration (FHA) announced the elimination of the flexible rate option on the Hickam standard. As of April 1, 2013, the home equity conversion (HECM) program will consolidate the fixed rate Hickam standard and fixed-rate Hickam saver initial mortgage insurance premiums and principal limit factors under the Hickam saver fixed interest rate pricing option. Prospective mortgagors seeking the adjustable interest rate mortgages can continue to use the Hickam standard pricing option and principal limit factors.

The reason given by HUD as for this change was “[t]o help sustain the (HECM) program as a viable financial resource for aging homeowners and to strengthen the Mutual Mortgage Insurance Fund, the (HECM) Saver will be the only initial MIP option available to mortgagors who seek the predictability of a fixed rate mortgage and lower upfront closing cost.”

Those who follow the reverse mortgage market take a slightly different view as to why HUD has made this change. Statistics show that the number of reverse mortgages being issued has increased in recent years and all indications point to continued increases for the foreseeable future. However, somewhat unexpectedly, the number of defaults has also increased. Although it is generally accepted that, because no payments are required on a reverse mortgage until sometime in the future, there can be no default due to lack of payments, there is growing confusion as to the responsibilities of the borrower to pay both the property taxes and their homeowners insurance premiums in a timely manner.

Because these defaults have occurred at a significantly higher rate in the HECM Standard Fixed product than the variable products, many believe the defaults can be linked in large part to the HECM Standard Fixed requirement that the entire amount of the reverse mortgage be paid upfront a lump sum. As such, once those initial funds are gone, in many cases there are no other resources available to the borrower. This problem could potentially be eliminated if the payments were delayed for those choosing either the monthly-income or line-of-credit option.

Another suggested reason for the increasingly high level of defaults is that taxpayers delay using reverse mortgages until after they have spent down all of their other assets. Proponents of this rationale suggest that retirees should consider a reverse mortgage as a possible income supplement during their pre-retirement planning.